Have low interest rates encouraged us to live beyond our means?

Have low interest rates encouraged us to live beyond our means?

Latest data released by ONS (Office of National Statistics) shows that UK households have seen their outgoings surpass their income for the first time in nearly 30 years. But what is driving this behaviour to apparently borrow more and save less?

In 2017 on average each UK household spent £900 more than they received in income, amounting to almost £25 billion. The last time households became net borrowers was in 1988, although the deficit then was significantly less at £ 0.3 billion.

These average statistics do not reflect the fact that all households are not equal and in fact lower earners proved to be much more likely to spend beyond their means.

The poorest 10% of households in fact spent two-and-a-half times their disposable income on average, whilst the richest 10% spent less than half of their available income during 2017.

Rising prices have led to increased spending in recent years, while disposable income has risen only modestly. The gap between disposable income and spending per head has closed to the narrowest in 11 years leaving us with less available to save, now only £41 per £1000 of income, the lowest ever recorded.

The amount of money owed in short-term loans has also risen by nearly one-third in the last five years, an expensive means of borrowing due to higher interest repayments. This consumer credit growth trend continued in June when the amount borrowed on credit cards rose by £600m and other loans increased by £1bn, meaning that lending was 8.8% higher than a year ago. Car finance is the fastest growing type of credit, with nearly 90% of new car purchases now funded this way.

While households borrowed nearly £80 billion in loans last year, the most in a decade, statistics show that they saved just £37 billion with UK banks, the least since 2011.

The continued low interest rate could well be responsible for making saving seem increasingly less attractive. Whilst the interest rate has been at or near a record low for the past decade at 0.5%, in an attempt to manage inflation, this has created financial conditions that are significantly more attractive for borrowers than savers.

Interestingly, despite budget pressures, households are investing more in property than ever before, a record high of £74 billion in 2017, most of which was spent on new homes and major home improvements.

It therefore seems likely that many believe that when savings rates are so low that investing in property will yield greater returns.

This is further supported by latest statistics which show mortgage approvals for house purchases hit a five-month high in June.

Given unattractive savings rates and less disposable income to invest it could be that UK households have had to change their financial behaviour. With the prospect of an interest rate rise later this week it remains to be seen if this will be sufficient to encourage savers again, or if it will be too small to have any significant effect on future behaviour except to worsen the debt burden for borrowers.

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